Banking sector going strong despite anticipated softened rates

According to National Financial Supervisory Commission (NFSC), this year until the end of August, the local financial and banking system effectively performed its capital supply obligations to feed the economy, all due to banks’ good liquidation.

Particularly, as of July 31, 2016, the total capital supply for the economy soared by 12.5 per cent against the end of 2015, to VND7,489 trillion ($342 billion).

The banking sector’s capital sources accounted for around 75 per cent of the total, a 9.1 per cent jump compared to early 2016 when the capital market (consisting of bonds and stocks) contributed approximately 25.1 per cent, up 24.3 per cent.

By the end of August, the total means of payment (M2) rose by 10.5 per cent against early 2016. The deposit volume raised by credit institutions hiked 11 per cent during the same period.

The business director of a Hanoi-based major commercial bank, in a recent talk with VIR, said that the inter-bank market featured ample liquidation throughout August, which was evidenced through a 0.3-0.5 percentage point (ppt) reduction in interest rates across the terms (compared to the previous month).

For example, the overnight rate hovered around 1 per cent per year, down 0.5 ppts, and the one-month rate fluctuated around the 2.14 per cent mark, down 0.36 ppts compared to the end of July.

According to Nguyen Duc Long, deputy head of the State Bank of Vietnam (SBV)’s Monetary Policies Department, the interest rate situation at local banks has remained stable in the past months, thanks to the synchronised application of a raft of measures.

“Since late-April, state-owned commercial banks and a number of joint stock commercial banks have slashed their short-term interest rates by 0.5 per cent per annum and brought medium and long-term rates to a maximum of 10 per cent per annum, in a bid to facilitate the operation of production and trading firms,” Long said.

Dinh Duc Quang, deputy general director of Ho Chi Minh City-based Orient Commercial Bank (OCB), assumed that the sharply declining inter-bank rates were an indubitable demonstration of banks’ fair liquidation, despite the fact that authorised management agencies have increasingly tightened the requirements on risk management and liquidation assurances in order to stabilise the financial system.

“The market may expect continued stability throughout the rest of 2016. The interest rate may even be slightly reduced as fresh capital is channelled into the economy,” Quang stressed.

Echoing his view, an NFSC leader has cited some favourable factors paving the way for banks to further soften the interest rates in late 2016.

These factors include commercial banks’ fair liquidation, stable foreign exchange market, government bond interest rates sliding further, and government bonds’ sales volume surpassing 89 per cent of the projection, which will help lessen the pressure on bank interest rates.

Otherwise, there have been concerns that the banking sector’s slow tackling of bad debts could hinder the rate of easing efforts.

Accordingly, in the first half of 2016, the whole banking sector tackled around VND59.7 trillion ($2.72 billion) in bad debts, down 14.5 per cent against the same period last year.

“The banking sector needs to ramp up efforts to deal with bad debts to reduce its need for risk provisioning,” said the NFSC leader.